In
his 2006 State of the Union address, President Bush mentioned
Health Savings Accounts (HSAs), and his priorities of
confronting the rising cost of health care, helping people
afford the health insurance they need, and making coverage
portable so that people don’t lose their health plan
when they change jobs. HSAs, which now cover over
3 million people, are already lowering people’s costs,
in many cases are totally portable, and provide powerful
incentives that will reduce healthcare costs for all.
Health
savings accounts allow individuals to purchase lower cost
high-deductible health insurance, and establish a savings
account in which a family can make a tax-deductible deposit
of up to $5450 each year to be used to cover future medical
expenses. Money can be withdrawn tax-free to pay
for covered expenses before the deductible is met.
It can also be used to cover expenses that are not normally
covered by health insurance, including dental treatments,
eye glasses, alternative therapies, and even household
medical expenses like aspirin. This in effect makes
all these expenses tax deductible.
If
the money is not withdrawn to cover medical expenses,
it grows tax-deferred like an IRA. The money can
be withdrawn penalty free at age 65 for any reason, and
tax-free if it is used to cover any medical expenses.
This would include Medicare premiums, nursing home charges,
or long-term care insurance.
In
addition to tax savings, HSA owners enjoy lower rates
on their health insurance. These plans are typically
30%-40% less expensive than traditional plans. Small
companies that switch from group plans to funding individual
HSA plans for their employees save even more. Any
money the employer contributes to the HSA for the employee
is tax-free, and if it is an individual plan and the employee
leaves the company, they can take their health insurance
with them.
For
the past 60 years, most health care has been paid for
and controlled by third parties such as the government,
insurers, and employers. Consumers rarely compared
prices or quality of service when shopping for health
care – partly because this comparison was usually
very difficult or even impossible, and partly because
the price often just didn’t matter to the consumer,
who was only responsible for a moderate co-payment.
Today
people are waking up to the idea that they should look
at their health insurance the way they look at their automobile
insurance or homeowners insurance. The coverage
is to pay for the major expenses, not the routine oil
changes. Because HSAs require that the insured cover
the first $1000 or more in health expenses, there is incentive
for the consumer to demand information about health care
pricing. This puts market pressure on the providers,
and is the beginning of dramatic change in the system.
The
most exciting thing about HSAs is this potential impact
they could have on the cost of health care. No system
has yet been devised in the history of mankind that does
more to increase quality and lower prices than a competitive
market system. As more and more consumers begin
to own health savings accounts, health care providers
will be forced to compete for their business by providing
better quality service and better prices.
The
other factor in play is the financial motivation the individual
will have to stay healthy. The vast majority of
health care spending today is due to degenerative diseases
such as high blood pressure, diabetes, metabolic syndrome,
cardiovascular disease, and other modern ailments that
are primarily the result of lifestyle choices. The
consumer who wisely spends his HSA dollars on preventive
care (which can be done tax-free) and pays attention to
diet and exercise could be rewarded with a substantial
amount of money in their Health Savings Account by age
65. As an epidemic of diabetes and other obesity-related
diseases loom over us, it is nice to see the government
setting up a system that rewards healthy behavior.
Health
savings accounts have the potential to be a powerful force
of change in the healthcare system. By instituting
competitive pressures, encouraging greater price transparency,
and rewarding consumers who are proactive about their
health, the growing adoption of Health Savings Accounts
will help make health care more affordable for everyone.
